According to Article 12 of the OECD Model Convention with Respect to Taxes on Income and on Capital, the term ‘royalties’ refers to ‘payments’ of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience’. As stated in the Glossary of Industrial Organisation Economincs and Industrial Law (term 116), published by the OECD, ‘Copyright, trademark and patent holders may license others to use or produce the good, usually in return for a fixed payment and a royalty rates’.
According to the Commentaries on the Articles of the Model Tax Convention (Commentary on Article 12, Paragraph 2 (point 8)), ‘the definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a licence and compensation which a person would be obliged to pay for fraudulently copying or infringing the right’.
There is an ongoing debate about whether the definition of royalties should be an open or a closed definition. The current approach used in the Model Tax Convention suggests that the closed definition is appropriate; however, some people argue that a new sentence should be included in the OECD definition that states that other types of rights or assets similar to those expressly mentioned may also bring about royalties.